November 28, 2022
Sector on Watch – “Boring Stocks”/XLP/XLV
The Dow is up 18% in the last two months, and is now only down 6.5% year-to-date. This recent performance far exceeds the gains for the S&P 500, which has rallied 11% but is down 16% on the year, and demolishes the Nasdaq, which has gained 6% in the last two months but is still down 29% year-to-date.
The Dow rally has mostly been led by “boring” stocks, many of which are represented in the Consumer Staples ETF (XLP). Think PG, PEP, KO, COST, WMT, CL, BUD. That said, there are plenty of “boring” pharmaceutical stocks such as GILD, PFE, MRK which are also making new recent highs. The best ETF for that grouping of stocks is the Healthcare ETF (XLV).
And into this “boring” rally option activity has been fairly strong, including these call buys recently:
Today - Buyer of 7,000 Kraft Heinz (KHC) April 42.5 Calls for $1.10 – Stock at 39
Today – Buyer of 5,000 Pfizer (PFE) December 52 Calls for $0.25 – Stock at 49.5 (38,000 calls have traded today vs. 11,000 puts, or a ratio of 3.2:1)
Last Wednesday - Buyer of 3,300 Walmart (WMT) March 170 Calls for $1.70 – Stock at 153
Last Tuesday - Buyer of 5,000 Gilead (GILD) December 87.5 Calls for $1.30 – Stock at 86.
Other stocks that are on my radar that fall into the boring category, and which I’ve referenced in previous weeks as they have soared higher following earnings, are SFM and TMUS.
I’m fairly intrigued by all of the stocks mentioned above, as almost all are breaking out to new highs today, even as the market is pulling back.
That being said, there is a bit of risk in getting involved as one could make the argument that these stocks have rallied too far, too fast. Also, there are two “big” market-moving events later this week via the release of the PCE report on Thursday (inflation) and the November Jobs Report on Friday.
Regardless, I will keep an eye out for continued call buying, and sectors/stock strength, headed into these market-moving events later this week.
November 28, 2022
Weekly Update
The holiday-shortened week was fairly positive as the S&P 500 rose 1.6%, the Dow added another 1.9%, and the Nasdaq gained 0.75% This week things get more interesting as trading volumes will likely pick back up again as traders return from the Thanksgiving holiday.
Stocks on Watch
As I’ve written several times, AAPL puts are on my watch list and continue to pique my interest. That being said, the market continues to show signs of life, so for now, I’m going to continue to watch and wait.
Speaking of watching and waiting, you may have heard a disgusted scream on Wednesday afternoon (coming from my house) after a trade made in Coupa Software (COUP) on Tuesday afternoon had shot the stock to the top of my watch list. While I did add COUP to my watch list, I wasn’t ready to buy just yet, and in the hours after the call buy positive news broke on the stock. First, here is the trade:
Tuesday – Buyer of 5,000 Coupa Software (COUP) March 50 Calls for $6.50 – Stock at 45.5.
So, what was the news that really angered me? The day after the call buy it was reported Vista Equity Partners was exploring an acquisition of Coupa, which sent the stock higher by 36%.
Those 5,000 March 50 calls that were bought for $6.50 closed the week at $16, or a quick potential profit of $4.75 million. Grrrr!
Moving on …
For years Gilead Sciences (GILD) has been jokingly referred to in the trading community as a “widow maker,” as every time the stock showed any signs of life it would almost immediately fall apart and then drift lower. In fact, while the S&P 500 is up 55% in the past five years, GILD is unchanged, and the only reason the stock is not down is because GILD is up 18% year-to-date.
The strong stock performance this year, after years of awful trading action, is intriguing. And on Tuesday, a trader bought calls looking for greater gains this month for GILD. Here is that trade:
Tuesday - Buyer of 5,000 Gilead (GILD) December 87.5 Calls for $1.30 – Stock at 86.
While I am unlikely to buy GILD calls expiring in December, I might instead target calls in the May/June time frame if this bullish stock and option activity continues.
Volatility
The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 20.5. This decline in the “fear index” was expected, as the long holiday weekend, which I wrote about last week, weighs HEAVILY on options prices.
I would expect, though not guarantee, the VIX will rise today and in the days to come as traders take the opportunity to buy the dip in puts/VIX.
Option Order Flow was fairly mixed this past week as my Options Barometer came in at:
Monday – 5
Tuesday – 7
Wednesday – 5
Events for the Week to Come
This week traders will be focused on the Personal Consumption Expenditure (PCE) report on Thursday and the November Jobs Report on Friday.
On the earnings front, this week there are several high-profile growth stocks reporting that have been through the ringer in 2023, including CRWD, SNOW, MRVL, WDA, OKTA, and more.
What Traders are Saying
The Financial Times ran a story in the last two weeks regarding put buying this year that I wanted to share and then comment on. Here are some excerpts from that article:
“A CBOE index that tracks a theoretical portfolio that buys both stocks within the S&P 500 and equity put options — known as the PPUT index — has fallen roughly 20 percent this year, not any better than the total return of the S&P 500.
“Dylan Grice, co-founder of Calderwood Capital, a hedge fund advisory and research firm, said the performance of put options this year had raised ‘fundamental’ questions about the point of some strategies. ‘It’s like an insurance company that doesn’t pay out when you have an accident,’ he said.
“The lackluster performance has been driven in part by the slow grind lower in the stock market, which has driven up costs without providing the sort of sharp sell-off that provided mammoth payoffs in the early days of the coronavirus pandemic in March 2020 or the midst of the financial crisis in September and October 2008.”
OK, now my thoughts …
First, I would assume the data is accurate. However …
We know, via our put buys this year, buying at-the-money puts on the indexes has absolutely worked. For example, in May we sold a piece of the SPY September 455 puts for a profit of 147% for Options Trader and a 186% gain for Options Trader PRO via the SPY 455/375 Bear Put Spread. In addition, we sold half of our March 420 Puts for 45% in the last two months.
Also, while the article highlighted put buying on the S&P 500 and its components, you can’t tell me that buying puts in growth stocks hasn’t worked this year. I can promise you buying puts on stocks like ZM/SQ/AMD/etc., which are down 50% or more in 2022, worked this year.
Stepping back, while I do think that the article is accurate, what it doesn’t do a great job of exploring is which puts the PPUT theoretically purchases. Here are the details …
“The PPUT portfolio is composed of S&P 500 stocks and of a long position in a one-month 5% out-of-the-money put option on the S&P 500 (SPX put).”
My read on the failure of this strategy is that it buys puts too close to expiration (one month), and the put they purchase is the wrong way to play it as well. What I mean is, while the market has been in a downtrend this year, if the strategy bought puts 5% out of the money at the wrong times and the market “only” fell 3-5% that month, the puts would expire worthless.
My big-picture takeaway: Puts HAVE worked this year. However, the PPUT strategy is flawed …when I want bearish exposure, I recommend puts that are AT-the-money and that have more than a couple months of time until their expiration.
Open Positions
Long positions: BAC, XBI, GOOG, LVS, OXY, PYPL, SBUX, CCJ, PINS
Bearish Positions: SPY
Bank of America (BAC) December 37 Covered Call – BAC gained 1.4% last week, which is perfect our covered call. Not much more to add.
Biotech ETF (XBI) January 84 Call – The XBI was mostly unchanged last week. Time is definitely becoming an issue for our calls, and should the ETF not get in gear, we will be selling this position soon.
Alphabet (GOOGL) February 120 Calls – GOOGL was also mostly unchanged last week. Not much more to add as the stock largely trades in-line with the Nasdaq, and it was a quiet week for the indexes.
Cameco (CCJ) December 26 Covered Call – CCJ gained 2% last week, which is perfect for our short volatility covered call.
Las Vegas Sands (LVS) March 44 Call – LVS was lower by 1% last week, which feels like a major win for the stock given further Covid-related lockdowns in China. This morning the stock is bid higher in the pre-market after the company was awarded a new 10-year gaming concession in Macau over the weekend. Of note, on Tuesday a trader bought 3,000 Las Vegas Sands (LVS) June 48 Calls for $4.45 – Stock at 42.3.
Occidental Petroleum (OXY) December 65/75 Bull Call Spread – On Tuesday we rolled our short strike down to the 75 strike. This adjustment lowered the cost basis on the spread to $3.91.
PayPal (PYPL) March 80 Call – PYPL fell 5% as growth stocks were under pressure last week. Option activity was very quiet in PYPL (not surprisingly given the holiday-shortened week).
Pinterest (PINS) March 25 Call – PINS gained 2.6% last week, again breaking above the 25 strike. I really like the way PINS looks compared to its growth peers.
S&P 500 ETF (SPY) March 420/320 Bear Put Spread – For now, I will continue to hold our hedge just in case the market once again falls apart.
Starbucks (SBUX) January 85/110 Bull Call Spread – SBUX gained another 1.8% last week and is approaching the $100 level. Our position is in terrific shape.
